Welcome to Money for the rest of us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it.

I'm your host David Stein today's episode 283. It's

titled Why You Should Care About Carry. I recently finished a book whose authors had the same editor at McGraw-Hill that I had

from my book. So my editor sent it to me. I read it. Very intriguing. It's titled The Rise of Carry, the

dangerous consequences of volatility suppression and the new financial order of

decaying growth and recurring crisis.

It's by Tim Lee, who runs an economics consultancy.

Jamie Lee, who works for Investment Manager Jeremy Grantham and Kevin Coldiron, who's a former

hedge fund manager who teaches a financial engineering class at UC Berkeley.

Here's their definition of carry.

Carry trades make money when nothing happens. The

carry trader receives a stream of income or profits but is exposed to the risk of a sudden loss when a particular event occurs

or the underlying acid value changes significantly. The carry is really that income stream or the

profits that the trader earns over the life of the transaction. Carry is an example of a factor, a broad persistent driver of return.

It's a factor because the investor is receiving compensation, the income stream, for bearing certain

financial risk. In this case, the risk of incurring large losses when a specific financial event occurs.

In other words, it's compensation for suffering through bad times.

Now it's somewhat similar to an insurance company that receives premium income and then pays

out if certain events occur, such as a home fire.

There are four characteristics of Carrie that distinguish them from

traditional insurance. Leverage, a sawtooth return pattern, fluctuating liquidity, and short exposure to volatility.

We'll go into detail on each of those because they'll help us understand what

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